Is Terramin Australia (ASX:TZN) A Risky Investment?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Terramin Australia Limited (ASX:TZN) does use debt in its business. But is this debt a concern to shareholders?

We've discovered 3 warning signs about Terramin Australia. View them for free.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

What Is Terramin Australia's Debt?

The image below, which you can click on for greater detail, shows that at December 2024 Terramin Australia had debt of AU$54.8m, up from AU$46.2m in one year. Net debt is about the same, since the it doesn't have much cash.

A Look At Terramin Australia's Liabilities

According to the last reported balance sheet, Terramin Australia had liabilities of AU$45.2m due within 12 months, and liabilities of AU$16.9m due beyond 12 months. Offsetting this, it had AU$214.0k in cash and AU$132.0k in receivables that were due within 12 months. So its liabilities total AU$61.8m more than the combination of its cash and short-term receivables.

Terramin Australia has a market capitalization of AU$156.6m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Terramin Australia's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

See our latest analysis for Terramin Australia

Since Terramin Australia has no significant operating revenue, shareholders probably hope it will develop a valuable new mine before too long.

Caveat Emptor

Over the last twelve months Terramin Australia produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at AU$4.2m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through AU$5.0m of cash over the last year. So suffice it to say we do consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 3 warning signs for Terramin Australia you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.